Ready to Flip a Property? 3 Questions to Ask Yourself Before Jumping in

In my previous posts at BiggerPockets, I have discussed long term investments in properties that will be leased to tenants, but there’s another popular form of property investing that is making a comeback: real estate flipping.

Once upon a time, during the height of the real estate frenzy and before the downturn, real estate flipping was pretty common. People would buy a property for a relatively low price, fix it up and invest in some improvements, then sell it to someone new for a tidy profit. Many people who had never been involved in real estate investment got into it, which unfortunately contributed some to the real estate downturn.

When real estate prices went south, flipping all but vanished from the public conversation. Though there were foreclosure homes everywhere that could have easily been improved, that was part of the problem: all the cheap housing pulled down the prices of non-foreclosure homes that surrounded them. You could improve the house all you wanted but if you set its price too high compared to all the other houses on the market, it would languish. If you needed to set the price high to recoup what you invested in improvements, one way or another, you were probably destined to lose money on your investment.

Of course, now that the real estate market is improving, real estate flipping is making a comeback. The housing market has recovered enough that it’s once again possible to make a profit off of buying a home, fixing it up and selling it for a higher price. Though real estate flipping has the potential to make a lot of money for your nest egg, just as with any type of investing, it has its risks.

3 Questions to Ask Yourself Before Trying to Flip a Property:

What is the local market like? Real estate is highly local. Not all locations have experienced the recovery in the same way. What prices are homes selling for in the immediate neighborhood surrounding the property? How many properties are for sale in the area? How many are foreclosures or short sales? Have there been other flips nearby? The prices of nearby properties will impact the amount for much you can sell the home.

How much needs to be invested in the property? Some places just need cosmetic updating for a good flip, while others need more intense work. The more work they need, the more money and time you’ll have to tie up in the property. Though the property might seem cheap now, you might be singing a different tune if you find yourself paying for unexpected problems down the road. The last thing you want to do is lose money on the flip by spending too much.

What is the potential resale value for the property? How much you spend on fixing it up should be balanced by how much you think you’ll get at the point of sale. You can’t just tack on the price of the upgrades to the price you paid for the property, the price will have to be comparable to other properties. Invest too much and, depending on the local market, you won’t be able recoup what you spent. Before you buy the property, evaluate it as if you had already made the upgrades and compare this “dream home” to other similar properties in the area. This could help you decide whether moving forward is a good idea or not.

Conclusion

Buy, fix, sell. In it’s most basic terms, it seems so simple, but there’s so much more to successful real estate flipping, including knowing about tax implications, restrictions on how fast you can resell a property in an association, and more. These questions can get you started, but they point to the basic essence of flipping and hint to the biggest points of trouble flippers encounter. But if you have a property you in mind, but can’t get to a positive answer with these simple questions, it’s not even worth scratching the surface on the more complex issues of real estate flipping.

What are your thoughts on flipping? Let’s discuss…

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About Author

For 12 years, Ken Horst has driven positive results through internet marketing for businesses of all sizes, from solo real estate agents to well-known brands. His MLS Maps website helps people find real estate and connects agents with clients. Check out the MLS MapsBlog for more tips and advice.

3 Comments

Another point to add is: what’s your back up strategy? In the event of a down-turn in the local market amidst a full rehab 3br houses may drop in value by a couple thousand dollars. I’ve seen it before where it happened and 4br houses comps remained solid. Some times its good to do a bit more research on the neighborhood and get a history of comps for a year or two (although you’re going on the ones from 90days ago max) in case huge fluctuated prices are popular for that neighborhood. Ten grand can be a killer to a flip budget. Even if its not going towards rehabbing.

Also regarding the back up strategy to sell is if it doesn’t flip in a 4 to 6 month timeframe then what? Will you do a lease/option, rent only or continuously lower the price by $3,000 to $5,000 every month until it sells?

Oh! and make sure if your goal is to flip at retail have the kitchen and bathrooms speaking volumns as a flip not as a rental. I’ve seen this horrible mishap a time or two. An investor gets an extreme deep discounted house in a superb section of town and rehabs it as a rental yet attempts to retail it for the highest comps. Of course it sits on the market for a year and counting while other properties that were rehabbed and up for sale around the same time as yours were sold in 120 days average.

Good points.
I will generally role point 1 into the other parts.
If you have high DOM and/or lots of distressed REOs and Short Sales bringing down values you need to account for it in the numbers.
You either take an ARV at the bottom of the non-distressed comps so you can be the best house but priced slightly under anything that isn’t a junker.
If you want to milk the highest price you better build in a lot more holding costs, probably 3-4 months more than you expected.